The debate over the benefits of leasing rather than purchasing an automobile continues. Proponents view vehicle leases as sophisticated, convenient, and tax-deductible. Others argue that the lessor is just renting a car at a much higher cost than purchasing it. I hope to steer clear of this debate. Still, as I distance myself, I’m going to look over my shoulder and whisper, “If the car company is pushing leases, it’s because they’re profitable.” Then, after a few more steps, I mumble – nearly hum, “Real Estate agents drive a lot for business. Be sure to read the mileage restrictions before signing the contract.” OK - Done. Now that we’re clear of the leased-vehicle dispute let’s turn to our purpose: taxation and deductions for real estate agents who lease a business vehicle.
Leased Vehicle Overview: With a few exceptions, the tax treatment of a leased vehicle is similar to owning a car. The agent has two choices: Deduct the standard mileage rate or deduct actual auto expenses. Which should an agent choose? That depends on which method provides the most tax-benefit, the amount of recordkeeping the agent wishes to do, and the tax-knowledge of the agent (if preparing their own return). I can’t say which method is best for you, but I can share the basics of each technique.
Standard Mileage Rate: Real Estate Agents using this deduction method for a leased vehicle must follow the procedures and rules discussed in our article - Real Estate Agents, Auto Deductions: Standard Mileage Rate. The primary difference between the standard mileage rate for a lease versus an owned vehicle is that the leased-mileage-rate does not include an allowance for depreciation. Regardless of this difference, a leased vehicle still enjoys the same mileage rate as an owned vehicle.
The standard mileage rate is more straightforward than the actual cost method. Agents using it must track the number of miles the vehicle is driven for business, commuting, and personal use during the year. The mileage deducted rate is set by the IRS each year and generally falls between fifty-four and fifty-nine cents per mile. In 2019, for instance, it is/was $0.58 per business mile.
Actual Cost Method: Using the actual cost method is more complex and requires additional recordkeeping, but often leads to a higher deduction for leased vehicles. The rules outlined in our article Real Estate Agents, Auto Deductions: Actual Cost Method apply to a leased vehicle with the few variations listed below:
- Lease Payments: Lease payments are deducted as a Rent Expense, not an Auto Expense.
- Lease Down Payment: A down payment or advance on a lease agreement is not deducted in the year of payment. Instead, it is amortized (deducted) over the term of the lease.
For example, Jane leases a vehicle for her business on July 1st. The lease term is for 36 months. She puts $2,000 down on the lease. She drives the vehicle 100% for business. The amount of the down payment she can deduct each month as rent is $55.56 ($2,000 / 36 months).July through December is six months, so the amount of the down payment deducted in the first year is $333.36 ($55.56 * 6).If her lease payment is $400 per month, she paid $2,400 ($400 * 6) for the six-months.Her total rent expense in year one is the deductible portion of the down payment plus the lease payment made, or $2,733.56 ($333.36 + $2,400).
- Lease-To-Purchase: A contract that leaves owning the vehicle after making all required payments is not a lease; it is a purchase. The car must be depreciated.
- Inclusion Amount: The term inclusion amount is a misnomer. It is a portion of lease payments not deductible as a rental expense. The inclusion amount is subtracted before taking the deduction.
The inclusion amount varies year-by-year based on the vehicle’s fair market (FMV) value when the lease is executed. The appendix to IRS Publication 463, Travel, Gifts, and Car Expenses list inclusion amounts by lease-year. In 2018, and later years, there is no inclusion requirement until the vehicle’s FMV exceeds $50,000. For leases starting in earlier years; however, the inclusion threshold is much lower. For contracts executed in 2017, for instance, an inclusion requirement begins at $19,000 for cars and $19,500 for trucks and vans.
How does the inclusion amount work? The inclusion amount is based on the value of the vehicle in the year the lease begins. The tables in the appendix of IRS Publication 463 list an inclusion amount that reduce the rental deduction claimed for each year of the contract. The amount is prorated based on the number of days the lease is active during its first and final year, and by the percentage of business-miles put on the vehicle.
For example, Randy, a commercial real estate agent in Maryland, signs a 36-month lease a vehicle on September 30, 2017, for $300 per month. The vehicle’s fair market value on the date the contract was signed was $28,500.Based on this FMV, the inclusion amount listed in Publication 463 is $23 in year one, $51 in year two, $75 in year three, and $89 in the fourth and final year he will pay on the lease. If Randy drives the vehicle 80% for business in 2017 his inclusion amount will be prorated based on the number of days the lease was active in 2017 and the percentage of business-miles put on the vehicle in 2017.
Calculation: $23 * (92 days / 365 days) * 80% Business Use
His 2017 inclusion amount is: $23 * 25.2% * 80% = $4.64
If Randy made $900 in lease payments for October, November, and December in 2017, his potential lease/rent deduction is $900 minus the inclusion amount, or $900 – $4.64 = $895.36. This is that amount he could deduct if he drove the vehicle 100% for business. Randy, however, only drove the car 80% for business.So, his rent deduction in 2017 is $716.29 ($895.36 * 80%).
Business Use Adjustment: As illustrated above, like most actual vehicle costs, the rent deduction for a leased vehicle is limited to the percentage of business miles driven during the year. Calculating the business use percentage is discussed in our vehicle actual expenses article. The article also discusses vehicle-related costs that are not subject to the business-use-percentage.
Take Away: Leasing can prove a substantial tax deduction for a real estate agent. However, it’s a deduction that comes with a few technical challenges. It’s also a deduction that may prove more costly than the tax-savings generated. Take care to determine whether a vehicle lease is in your best interest. Consider its cost and mileage limitations before signing the contract.
Summary and Invite: We hope this article has helped you to understand the deductibility of leasing a vehicle. If you’d like to learn more about cutting your most significant expense, TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.